SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ________________________
Commission file number 1-10967
ENHANCE FINANCIAL SERVICES GROUP INC.
(Exact name of registrant as specified in its charter)
New York 13-3333448
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
335 Madison Avenue, New York, New York 10017
(Address of principal executive offices)
(Zip Code)
(212) 983-3100
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. 18,741,554 shares of common
stock, par value $.10 per share, as of May 12, 1997.
ENHANCE FINANCIAL SERVICES GROUP INC.
INDEX
PAGE
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Part I FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, l997 and December 3l, 1996 ................. 3
Consolidated Statements of Income -
Three months ended March 31, 1997 and 1996 ........... 4
Consolidated Statement of Changes
in Shareholders' Equity -
Three months ended March 31, 1997 .................... 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 1997 and 1996 ........... 6
Notes to Consolidated Financial Statements ............. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 8-10
PART II OTHER INFORMATION ........................................... 11
Signature ............................................................. 12
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
1997 1996
--------- ------------
Assets
Investments:
Fixed maturities, held to maturity, at amortized cost
(market value $226,514 and $227,048) ...................... $ 219,023 $ 217,692
Fixed maturities, available for sale, at market
(amortized cost $533,382 and $526,973) .................... 533,940 539,884
Common stock, at market (cost $498) ........................ 878 878
Investment in affiliates ................................... 25,034 24,182
Short-term investments ..................................... 36,133 33,247
Cash and cash equivalents .................................. 14,509 5,385
----------- ---------
Total investments ........................................ 829,517 821,268
Premiums and other receivables ............................... 31,340 22,472
Accrued interest and dividends receivable .................... 10,355 11,434
Deferred policy acquisition costs ............................ 89,121 87,325
Federal income taxes recoverable ............................. 3,137 1,428
Prepaid reinsurance premiums ................................. 2,921 2,793
Reinsurance recoverable on unpaid losses ..................... 1,704 1,823
Receivable from affiliates ................................... 10,330 22,205
Receivable for securities .................................... 22,849 2,370
Other assets ................................................. 43,480 10,325
----------- ---------
TOTAL ASSETS ............................................... $ 1,044,754 $ 983,443
=========== =========
Liabilities and Shareholders' Equity
LIABILITIES
Losses and loss adjustment expenses .......................... $ 28,674 $ 28,081
Reinsurance payable on paid losses and loss adjustment expense 3,920 2,463
Deferred premium revenue ..................................... 271,251 268,997
Accrued profit commissions ................................... 3,249 3,050
Current income taxes ......................................... 1,762 0
Deferred income taxes ........................................ 42,954 46,402
Long-term debt ............................................... 75,000 75,000
Short-term debt .............................................. 49,575 42,575
Payable for securities ....................................... 28,938 2,083
Accrued expenses and other ................................... 29,395 26,443
----------- ---------
TOTAL LIABILITIES .......................................... 534,718 495,094
----------- ---------
SHAREHOLDERS' EQUITY
Common stock $.10 par value
Authorized-30,000,000 shares ............................... 1,913 1,853
Additional paid-in capital ................................... 222,254 201,847
Retained earnings ............................................ 295,612 283,791
Unearned compensation ........................................ (20) (20)
Unrealized gains ............................................. 579 8,635
Treasury stock ............................................... (10,302) (7,758)
----------- ---------
TOTAL SHAREHOLDERS' EQUITY ................................. 510,036 488,349
----------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................. $ 1,044,754 $ 983,443
=========== =========
See notes to unaudited consolidated financial statements
-3-
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
Three months ended
March 31,
1997 1996
---- ----
Revenues
Net premiums written ............................. $ 21,627 $ 20,447
Increase in deferred premium revenue ............. (2,125) (1,195)
-------- --------
Premiums earned ............................... 19,502 19,252
Net investment income ............................ 12,247 11,476
Net realized gains (losses) on sale of investments (2,436) 1,360
Assignment sales ................................. 2,168 --
Other income ..................................... 994 481
-------- --------
Total revenues ................................ 32,475 32,569
-------- --------
Expenses
Losses and loss adjustment expenses .............. 1,962 2,377
Policy acquisition costs ......................... 6,969 6,322
Profit commissions ............................... 199 329
Other operating expenses - insurance ............. 1,827 2,843
- non-insurance ........ 1,848 714
-------- --------
Total expenses ................................ 12,805 12,585
-------- --------
Income from operations ........................... 19,670 19,984
Equity in net income (loss) of affiliates ........ 78 (470)
Foreign currency losses .......................... (1) (47)
Interest expense ................................. (1,356) (1,393)
-------- --------
Income before income taxes .................... 18,391 18,074
Income tax expense ............................... 4,523 4,835
-------- --------
Net income .................................... $ 13,868 $ 13,239
======== ========
Primary earnings per share .......................... $ 0.74 $ 0.76
======== ========
Fully diluted earnings per share .................... $ 0.73 $ 0.73
======== ========
See notes to unaudited consolidated financial statements
-4-
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(In thousands except share amounts)
Common Stock Treasury Stock Additional
--------------------- -------------------- Paid-in Unearned
Shares Amount Shares Amount Capital Compensation
------ ------ ------ ------ ------- ------------
Balance, December 31, 1996.............. 18,533,325 $1,853 464,275 ($7,758) $201,847 ($20)
Change in unrealized gain (loss)........
Dividends paid ($0.11 per share)........
Exercise of stock options............... 184,614 18 4,449
Issuance of common stock................ 416,912 42 15,958
Purchase of treasury stock.............. 72,925 (2,544)
Net income..............................
----------- -------- --------- --------- -------- ----------
Balance, March 31, 1997................. 19,134,851 $1,913 537,200 ($10,302) $222,254 ($20)
=========== ======== ========= ========= ======== ==========
Unrealized Retained
Gains (Losses) Earnings Total
Balance, December 31, 1996.............. $8,636 $283,791 $488,349
Change in unrealized gain (loss)........ (8,057) (8,057)
Dividends paid ($0.11 per share)........ (2,047) (2,047)
Exercise of stock options............... 4,467
Issuance of common stock................ 16,000
Purchase of treasury stock.............. (2,544)
Net income.............................. 13,868 13,868
-------- --------- ---------
Balance, March 31, 1997................. $579 $295,612 $510,036
======== ========= =========
See notes to unaudited consolidated financial statements
-5-
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three months ended
March 31,
1997 1996
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................. $ 13,868 $ 13,239
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization, net .................... (2,190) (2,069)
(Gain) loss on sale of investments, net ............... 2,436 (1,360)
Equity in (net income) loss of affiliates ............. (78) 470
Compensation, restricted stock award program .......... -- 21
Change in assets and liabilities net of effects from
consolidation of previously unconsolidated affiliate:
Premiums and other receivables ................... 2,461 2,983
Accrued interest and dividends receivable ........ 1,079 1,637
Accrued expenses and other liabilities ........... (1,754) (2,245)
Deferred policy acquisition costs ................ (1,796) (269)
Deferred premium revenue, net .................... 2,126 1,118
Accrued profit commissions ....................... 199 (1,102)
Losses and loss adjustment expenses, net ......... 2,169 762
Other assets ..................................... (152) (2,234)
Income taxes, net ................................ 880 2,597
-------- ---------
Net cash provided by operating activities .................. 19,248 13,548
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ......................... (179) (163)
Proceeds from sales of investments ......................... 62,471 249,514
Purchase of investments .................................... (63,068) (254,039)
Purchases of short-term investments, net ................... (2,528) (13,022)
Investment in affiliates ................................... (4,500) (1,001)
Cash of previously unconsolidated affiliate ................ 147 --
-------- ---------
Net cash used in investing activities ...................... (7,657) (18,711)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receivable from affiliates ................................. (9,343) --
Capital stock .............................................. 4,467 1,892
Long-term debt ............................................. 7,000 --
Dividends paid ............................................. (2,047) (1,790)
Reissuance of treasury stock ............................... -- 14,688
Purchase of treasury stock ................................. (2,544) (38)
-------- ---------
Net cash (used in) provided by financing activities ............. (2,467) 14,752
-------- ---------
Net change in cash and cash equivalents ......................... 9,124 9,589
Cash and cash equivalents, beginning of period .................. 5,385 8,782
-------- ---------
Cash and cash equivalents, end of period ........................ $ 14,509 $ 18,371
======== =========
See notes to unaudited consolidated financial statements
-6-
ENHANCE FINANCIAL SERVICES GROUP INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
PERIODS ENDED MARCH 31, 1997 AND 1996
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q under Rules and Regulations of
the Securities and Exchange Commission and do not include all of the information
and disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Annual Report on Form 10-K for the
year ended December 31, 1996 of Enhance Financial Services Group Inc. ("Enhance
Financial").
The accompanying unaudited consolidated financial statements have not been
audited by independent auditors in accordance with generally accepted auditing
standards. However, in the opinion of management such financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position and results of operations of
Enhance Financial and Subsidiaries (collectively the "Company"). The results of
operations for the three months ended March 31, 1997 may not be indicative of
the results that may be expected for the year ending December31. 1997.
2. DIVIDENDS DECLARED
In March 1997, Enhance Financial declared and paid a cash dividend of $.11 per
share totaling approximately $2,047,000.
3. COMMON STOCK
In the first quarter of 1997, Enhance Financial issued approximately 420,000
shares of common stock to acquire an additional 37.5% interest in Singer Asset
Finance Company, L.L.C. ("Singer"), bringing Enhance Financial's total ownership
interest in Singer to 87.5%.
In April 1997, Swiss Reinsurance Company purchased from existing shareholders an
additional 700,000 shares of Enhance Financial common stock for $39.00 per
share. Swiss Reinsurance Company's ownership of Enhance Financial now represents
9.1% of the total Enhance Financial common stock outstanding.
During the first quarter of 1997, Enhance Financial repurchased 72,925 shares of
its common stock outstanding at prices ranging from $35.00 to $39.25 as part of
its stock repurchase program.
4. RECLASSIFICATION
Certain of the 1996 amounts have been reclassified to conform to the current
year presentation.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Enhance Financial Services Group Inc. ("Enhance Financial," and together with
its consolidated subsidiaries, the "Company") is a holding company that, through
its subsidiaries, principally Enhance Reinsurance Company and Asset Guaranty
Insurance Company (the "Insurance Subsidiaries"), provides financial guaranty
insurance and reinsurance and other products and services utilizing the
Company's credit-related analytic skills.
The Company acquired a majority ownership interest (increased from a 50%
interest) in Singer Asset Finance Company, L.L.C. ("Singer") in March 1997. The
results of Singer have been consolidated since that date.
Results of Operations
Three Months Ended March 31, 1997 vs.
Three Months Ended March 31, 1996
Gross premiums written in the first three months of 1997 were $22.4 million
compared with $22.1 million in the same period in 1996, representing an increase
of 1.0%.
Net premiums written increased 5.8% to $21.6 million in the first three months
of 1997 from $20.4 million in the same period in 1996. Of the Company's net
premiums written in the first quarter of 1997, 42.1%, 12.0% and 45.9% were
derived from the reinsurance of municipal bonds, the reinsurance of
non-municipal obligations and the Company's other insurance lines, respectively,
compared to 27.3%, 21.8% and 50.9% during the same period in 1996.
In the first quarter of 1997, industry new-issue volume was $38.4 billion, a
7.9% decrease over the same period in 1996. The insured portion of such new
issues was 52.5% and 47.3% during the first quarters of 1997 and 1996,
respectively. Total municipal bond refundings in the first three months of 1997
represented 23.8% of new-issue volume, down from 29.9% for the 1996 first
quarter.
Earned premiums grew 1.3% to $19.5 million in the first quarter of 1997 from
$19.3 million in the 1996 first quarter. The increase in earned premiums
reflected growth from the Company's other insurance lines, which contributed
$8.2 million of earned premiums in the 1997 first quarter, compared to $7.0
million in the comparable 1996 quarter, offset in part by a decrease in
refunding activity from 1996 to 1997. Earned premiums from refundings
contributed $2.3 million (or 11.8%) of earned premiums in the 1997 first quarter
compared to $3.5 million (or 18.3%) in the same period in 1996. Deferred premium
revenue grew to $268.3 million at March 31, 1997 from $266.2 million at the
beginning of 1997.
Net investment income increased 6.7% to $12.2 million in the first three months
of 1997 from $11.5 million in the same period in 1996. This increase resulted
primarily from the growth in the Company's investment portfolio from $747
million at March 31, 1996 to $804 million at March 31, 1997. The average yields
on the Company's investment portfolio were 6.2% and 6.3% for the first quarters
of 1997 and 1996, respectively. In addition, the Company realized $(2.4) million
of capital losses in the first quarter of 1997 compared with $1.4 million of
capital gains in the first quarter of 1996.
The Company recognized revenues from disposition of assignments, through
securitization and other sales, of $2.2 million in the period.
Incurred losses and LAE were $2.0 million and $2.4 million in the first quarters
of 1997 and 1996, respectively.
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company's expense ratio was 46.1% in the first quarter of 1997 compared to
49.3% in the 1996 first quarter. Including non-insurance expenses, the Company's
expense ratios were 55.6% and 53.0% in those respective periods. Non-insurance
expenses include the expenses of Singer, whose results have been consolidated
following the Company's acquisition of a majority interest in the first quarter
of 1997, and those expenses attributable to the Company's diversification
activities. Policy acquisition costs ("PAC") were $7.0 million and $6.3 million
for the first quarter of 1997 and 1996, respectively, representing 35.7% and
32.8% of earned premiums in those respective periods.
The increase in PAC ratio and decrease in the overall expense ratio reflects, in
part, a greater proportion of internal costs being directly attributable to the
acquisition of new and renewal business. Non-insurance expenses increase to $1.8
million in the first quarter of 1997 from $0.7 million during the same period in
1996 reflecting the inclusion of Singer's expenses on a consolidated basis in
the 1997 first quarter.
The Company realized net income of $0.1 million from its equity investments in
the first quarter of 1997 compared to a loss of $0.5 million in the 1996 first
quarter. These include the Company's share of the net income of Singer prior to
the purchase of its majority interest in March 1997, from which time the results
of Singer have been consolidated.
Interest expense totaled $1.4 million in each of the first quarters of 1997 and
1996.
The Company's effective tax rate for the first quarter of 1997 was 24.6%
compared to 26.8% for the 1996 comparable period. The decrease in the tax rate
reflects an increase in the tax exempt component of the Company's investment
portfolio as well as the tax benefit of capital losses realized during the first
quarter of 1997.
The Company's 1997 first-quarter net income increased 4.8% to $13.9 million from
$13.2 million in the first quarter of 1996. First-quarter 1997 primary earnings
per share decreased 2.6% to $.74 per share from $0.76 per share for the first
quarter of 1996. This decrease reflects the capital losses realized during the
quarter as well as an increase in the weighted average shares outstanding
compared to the prior year. Operating earnings per share, which excludes the
impact of capital gains and losses, increased 15.4% to $0.82 from $0.70 in the
1996 first quarter.
The weighted average shares outstanding during the first quarter of 1997 was
18.86 million compared to 17.45 million for the first quarter of 1996.
II. Liquidity and Capital Resources
As a holding company, Enhance Financial finances the payment of its operating
expenses, principal and interest on its debt obligations, dividends, if any, to
its shareholders and the repurchase of Common Stock primarily from dividends and
other payments from the Insurance Subsidiaries. The Company also draws on the
line of credit provided under the credit agreement described below between
Enhance Financial and its bank lenders. Payments of dividends to Enhance
Financial by the Insurance Subsidiaries are subject to restrictions relating to
statutory capital and surplus and net investment income. As of March 31, 1997,
the maximum amount of dividends available from the Insurance Subsidiaries
without prior approval of the insurance regulatory authorities was $14.9
million. During the first quarter of 1997 the Insurance Subsidiaries paid
dividends of $6.0 million to Enhance Financial.
The Company's cash flow from operations for the first quarter of 1997 was $19.2
million compared to $13.5 million for the same period in 1996. The Company's
investment portfolio increased to $804 million at March 31, 1997 from $797
million at December 31, 1996 as a result of the cash flows from operations
offset by a decrease in the unrealized gain on the available-for-sale component
of the portfolio during the quarter.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company maintains a credit agreement with two major commercial banks
providing for borrowings of up to $60 million to be used for general corporate
purposes. As of March 31, 1997, the Company had borrowed $49.5 million under the
credit agreement including $7.0 million drawn down during the first quarter of
1997.
In March 1997, Enhance Financial declared and paid a regular quarterly dividend
of $.11 per share, totaling $2.0 million.
-10-
PART II- OTHER INFORMATION
None
-11-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENHANCE FINANCIAL SERVICES GROUP INC.
Date: May 14, 1997 By: /s/ Arthur Dubroff
-------------------------------------
Arthur Dubroff
Executive Vice President (duly
authorized officer) and Principal
Financial Officer
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